Research Blog – INTERNAL USE ONLY

Key Takeaways:

 

Current Price: $54.5               Price Target: $61

Position Size: 1.47%               1-year Performance: +30%

 

Sensata released its 2Q21 earnings this morning. Sales grew 63% organically thanks to end-market recovery and their own market outgrowth, while operating income grew 179% due to top line growth and productivity. The China VI regulations has led to a nice content per truck increase. The management team remains cautious in its auto production growth, expecting a rebound still from 2020 but lowering it to +5% globally for the year, while IHS predicts a 9% growth rate. On the positive side, ST now sees better recovery in Heavy Vehicles and Industrials end markets. The chip shortage situation is impacting the auto and heavy vehicles production, but Sensata’s industrial portfolio came in stronger than expected. The current cash balance is $1.9B, leaving plenty of room for additional M&A. Net leverage ratio is 2.7X, decreasing from 2.9X last quarter. The stock is trading down slightly today due to the reduction in auto production outlook for the rest of 2021. We think the company has plenty of opportunities going forward thanks to its push in the electrification theme and see the near-term auto production downgrade as a minimal risk to the investment thesis.

 

Sales growth by segment:

• Automotive organic sales +75%: ST outgrew the market by 990bps, excluding channel restocking. This is driven by powertrain and emissions, safety, electrification applications despite chip shortage. The company expects restocking to be a further tailwind going forward.
• HVOR organic revenue +96% y/y: outgrew the market by 2,850bps, excluding channel restocking. This is driven by the China VI emissions regulations, operator controls, RADRA safety and tire pressure monitoring applications
• Industrial & other revenue +29%. Growth was driven by heating, ventilation and air conditioning, new electrification launches and restocking.
• Aerospace sales +20.6%, as OEM production improved and air traffic recovery (aftermarket business)

 

2021 guidance was raised to account for the good 2Q results and is now:

• Organic sales +19-21% from +16-21%
• Adjusted EBIT $782M-818M from $755M-805M
• EPS $3.42-$3.62 from $3.20-$3.50

 

The Thesis on Sensata

• Sensata has a clear revenue growth strategy (content growth + bolt-on M&A)
• ST is diversifying its end markets exposure away from the cyclical auto sector over time through acquisitions, also expanding its addressable market size
• ST is a consolidator in a fragmented industry and still has room to acquire businesses
• Margins should expand as the integration of the prior two deals is under way, regardless of top line growth, and efficiencies in manufacturing are continuously pursued as they are gaining scale
• ST is deleveraging its balance sheet post acquisitions, leaving room for future M&A or a return to share buybacks, and improving EPS growth

 

 

Tag: ST

category: earnings

$ST.US

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

Key takeaways:

 

Current Price: $368        Price Target: $469  

Position Size: 2.74%      1-year Performance: -4.6%

 

Lockheed released its 2Q21 earnings results this morning. The company missed on the operating profit line due to a one-time charge in a classified program (expected to become a franchise production contract in the coming years) within its Aeronautics segment. While the stock is down, breaking from its usual “beat and raise” trend, the company did not reduce its full-year outlook due to this issue.

 

• Revenue growth of 5% organically and segment operating margin decreased 80bps due to Aeronautics performance issue ($225M loss)
• F35 program sales were higher than expected thanks to increased production
• Sikorsky performing well (adding 6% growth to the Rotary segment)
• Looking into 2022, space & hypersonics, F-16 and helicopter production should be good drivers to top-line growth
• Sales per segment were as follow:
• Aeronautic +3% 
• Missiles and Fire Control +5% 
• Rotary and Mission Systems +5%
• Space Systems +10%: good growth in hypersonics, NexGen Overhead Persistent Infrared (OPIR Satellite)

 

• Book to bill at 0.66X continues to decrease moderately. Backlog was down 4% from the end of 2020
• Cash from operation was $1.3B, and LMT returned $1.2B to shareholders through dividends and share repurchases
• The company made an accelerated $1.4B payment to suppliers, continuing to mitigate the Covid-19 risks
• Total YTD share repo is $1.5B
• Slight 1% increase in EPS guidance, sales & segment EBIT unchanged (EBIT would go up if no charge) , cash from ops reiterated but includes the Aeronautics charge
• Acquisition of Aerojet Rocketdyne (announced in December) is still under review with the FTC

 

• CEO quote: “we’re going to […] make our current and future platforms way more competitive, way more attractive, use our network effect to get more value for money for the money for the government and see how the budget can shift our way“
• CFO quote: “So F-35, rough numbers 27%, 28% of our portfolio, so when you think about where we’re and where we’re going with that program, so we’re right now for production in the midst of our product — what’s called a production rebaseline. And that’s basically due to COVID and trying to get our technology refresh three on Lot 15 and Lot 4 onto Lot 16. The customer — the joint program office is working with all the key constituents to look at what makes sense. As you recall, this year, we’re going to deliver anywhere from 133 to 139 aircraft. What makes sense next year and the next couple years, to make sure we maximize when we put that key technology on that aircraft. So you’re going to likely see once that gets revealed, and hopefully, it’ll be a –we’ll be able to reveal that with the customer when we give trend data in October, but it’s likely to show the plateau of production slightly pushed out to the right but also elongating if you will.“

 

 

 

 

LMT Thesis:

·         Lockheed Martin is a primary beneficiary from the replacement cycle for aging military aircraft and ships

·         Excellent management team focused on returning capital to shareholders

·         Strong cash flow and financial position

    

[category earnings] [tag LMT] $LMT.US

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

On 7/20, Travelers reported Q2 EPS of $3.45, ahead of estimates of $2.40.  Positives for the quarter were continued pricing gains, higher margins, and ROE of 13.7%.  The strong results were helped by low cat losses, strong investment returns and favorable prior year reserve development.

 

Travelers is a high quality, disciplined underwriter of insurance that is focused on returning capital to shareholders through dividends and share buybacks. 

 

Current Price: $147                                Price Target: $170

Position Size:   1.55%                              TTM Performance: +27.4%

 

Thesis Intact. Key takeaways from the quarter:

 

1.       Core business results were solid, beating estimates

·         Combined ratio flat YOY at 91.4%

·         Net written premiums increased 8% for quarter

·         Strong pricing with renewal premiums up

o   Business +9.5%

o   Bond & specialty +12.7%

o   Homeowners +8.2%

o   International +6.9%

·         The industry has faced several headwinds – higher cat losses, negative tort trends and falling yields.  As a result, industry wide pricing has been strongest in 10 years.

               

2.       Total net Investment Income rose $92m QOQ due to strong returns in private equity investments as returns from fixed income were level with last quarter.

 

3.       Strong financial position

·         Debt to capital ratio of 22.0%

·         Most of debt is long term – just issued a 30yr bond yielding 3.05%

·         98.4% of fixed income portfolio is investment grade with average rating of AA

·         Strong rankings from rating agency relative to peers

 

4.       TRV continues to return capital with dividend yields 2.38% and shareholder yield over 7%

·         Repurchased 2.6m shares during Q2 for $401m

·         Over past 10 years shares outstanding have fallen by 53%!

·         Management has a long history of employing capital wisely! Instead of investing in mature business with spotty pricing, they have returned excess capital to shareholders

 

• Analysts’ concerns remain focused on profitability of their auto insurance and workers compensation units (about 25% of premiums), which were an issue prior to the pandemic.  Travelers has been raising pricing which should improve profitability.

 

The Thesis on TRV:

·         We expect TRV will be able to grow book value per share in the mid-single digits over the near-medium term, and generate ROE in the 10-14% range

·         Industry leader with disciplined underwriting and investment portfolio track record  

·         Consistent returns in the low to mid double digits

·         Responsible capital allocation and proven desire to act in the best interests of shareholders

 

Please let me know if you have any questions.

Thanks,

John

 

[category Equity Earnings]

$TRV.US

 

 

John R. Ingram CFA

Chief Investment Officer

Partner

 

Direct: 617.226.0021

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Key takeaways:

 

Current Price: $169      Price Target: $200 

Position size: 2.21%     1-Year Performance: +13%

 

 

• 2Q2021 results were above expectations, and 2021 guidance is conservative in our view:

 

• Overall sales +24% organic, adjusted EPS +48.5%
• Pharma segment performing well with sales +11% organically
• Covid vaccine sales came $164M below $785M consensus expectations
• Key new drugs performed very well, most businesses are back to pre-covid levels
• Oncology +24%, immunology +16%
• Consumer segment: +10% growth
• Over the counter sales growth of +14% drove the beat, recovering from pandemic hit
• Oral care +7%
• Baby care +9% (Aveeno sales online doing well)
• Skin care/beauty +16%
• Medical Devices: +59% organic sales growth (+8% growth vs 2Q 2019)
• All business lines outperformed, rebounding from last year’s covid disruption, and recapturing deferred procedures
• Restocking added 130bps to growth
• US and Asia are above 2019 levels
• Covid remains a disruption in EMEA and Latam

 

• Dividend remains a priority, followed by M&A

 

• The management team did not discuss recent press reports citing a potential spin-off of its talc-based products, nor did it discuss other press reports on possible settlements for the opioid litigation

 

• Operating margins came in line with expectations, thanks to lower COGS (from lower vaccine sales), while SG&A and R&D spending came above

 

• 2021 guidance raised:
• Revenue raised to $91.3B -$92.1B (+9.5%-10%) from $90.6B-$91.6B, excluding sales from the vaccine. We think there is room for further improvement as the raise was pretty conservative following Q2 beat
• 2H outlook: in medtech: management does not expect a linear recovery going forward due to uptick in covid cases. They are seeing some hospitals beginning to defer care due to recent rise in numbers
• EPS guidance raised to $9.60-$9.70 from $9.42-$9.57, this is helped by below the line items like taxes, and non-operating income

 

 

 

Thesis on JNJ:

• High quality company with consistent 20% ROE, attractive FCF yield,
• Investments in the pipeline and moderating patent expirations create a profile for accelerated revenue and earnings growth
• Growth opportunity: Medical Devices and Consumer offer sustainable growth and potential for expansion internationally
• Strong balance sheet that offers opportunities for M&A.

 

 

 

[category Equity Earnings]

[tag JNJ]

$JNJ.US

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

Current price: $192         Target price: $201

Position size: 2.3%           TTM Performance: 14%

 

 

Key takeaways:

• Seeing record level of tower activity as existing wireless carriers increase their 5G spend in what should be a massive, decade-long investment and DISH is starting to build a new nationwide 5G network from scratch.
• Stock is down (after hitting an all-time high recently) on lowered full yr. small cell guidance. Long-term small cell growth dynamics intact.

• Solid AFFO/share growth – they now anticipate 12% growth in AFFO/share for the full year 2021, meaningfully above their long-term annual target of 7% to 8%. They expect to grow the dividend in line w/ AFFO growth.

• 5G investment cycle is (finally) ramping…CEO Jay Brown said, “Following a period of building excitement and anticipation, we have seen a significant increase in activity as our customers have started to upgrade their networks to 5G at scale.”

 

Additional highlights:

• Quote from the call: “We are seeing the highest level of tower activity in our history as our customers are focusing on utilizing towers in the first phase of deploying their 5G networks nationwide. This initial focus on towers has led to delays in some of our small cell deployments that impacts the timing of when we expect to complete the nearly 30,000 small cells currently in our backlog.”
• Carrier spend focused on deploying mid-band spectrum led to reduced full year outlook for small cell deployments (to 5,000 vs. 10,000 prior) but LT dynamics intact – in the near-term, carrier focus is on C-Band (mid-band) deployment which is stalling small cell deployment growth.
• Mid-band (C-band) and high-band (mmWave) spectrum are both are relevant for 5G and will drive lease up activity for CCI.
• C-Band is the first stage of 5G deployment and is often referred to as the “goldilocks” band as it is an ideal balance between bandwidth and propagation (i.e. its ability to carry more data and travel far distances). It can be deployed via towers and small cell.
• Carriers just spent a ton (~$90B) at the recent C-band spectrum auctions and now they’re focused on deploying it.
• High-band (mmWave) spectrum is the next stage and is relevant for what’s often called the “real 5G” which would deliver on the huge gains in performance that 5G promises (step function increase in latency and bandwidth). It has significantly more capacity, but over a fraction of the geographic coverage area (lower propagation) which is why it needs to be deployed using small cells connected to fiber, making it ideal for dense urban areas. This densification is a driver of additional leasing. Growth in small cells should drive improving returns as they expect decreasing capital intensity for growth within their small cell and fiber business. With small cells there are “anchor nodes” and “colocation nodes” – the first “anchor” nodes are a lower ROI and additional nodes on existing infrastructure have higher incremental margins. So as lease-up activity continues, their ROI improves.
• Balance sheet strength – They continue to methodically reduced the risk profile of their balance sheet. In Q1, they lowered weighted average borrowing costs and extended the average maturity of their debt. Since they achieved their initial investment grade credit rating ~ 5 yrs ago, they have increased average debt maturity from 5 yrs to 10yrs, reduced average borrowing costs to 3.1% from 3.8%, increased mix of fixed-rate debt to > 90% from < 70% and reduced reliance on secured debt to ~15% from ~50%. No meaningful near term debt maturities and ~$4B of undrawn capacity on their revolving credit facility.
• Sustainability/ESG considerations…
• “Our business is inherently sustainable” – shared infrastructure solutions limit the proliferation of infrastructure and minimize the use of natural resources
• Their solutions also help address societal challenges like the digital divide in under-served communities by advancing access to education and technology.
• Enhance focus on ESG may drive increased revenue opportunities from things like smart cities and “broadband for all” and lower operating costs in areas like tower lighting and electric vehicles
• Reasonably valued – trading at ~3.7% 2021 AFFO yield. With LT AFFO/share growth of 7-8% and ~3% dividend yield, they should compound total returns low double-digits over a long period of time as demand for their shared infrastructure offering is tied to robust mobile data growth (~30% annually).

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$CCI.US

[category earnings]

[tag CCI]

 

On 7/16, Bank of America (BAC) reported core Q1 EPS of $.84 ahead of estimates of $.77.  Highlights for the quarter were continued deposit growth, strong credit metrics and balance sheet quality. Concerns were negative loan growth as low rates encouraged refinancing of residential mortgages.  BAC’s earnings are levered to rising rates, providing ballast to the portfolio.  We expect the announced dividend increase (+17%) and share buybacks to support stock price.

 

Current Price: $38.5                         Price Target: $40

Position Size:   2.24%                       Trailing 12-month Performance: 61.7%

 

Highlights:

• Deposits surged 20% YOY spurring growth in equity of 3.0% YOY
• Strong metrics for loan quality throughout pandemic. This quarter BAC released $1.6b in loan loss reserves.
• Over $31b of excess capital – announce 17% increase in dividend with last quarter’s announcement of $25b share buyback which is worth 7.5% of outstanding shares.

Concerns:

• Expenses remain higher than pre-pandemic levels. During quarter BAC donated $500m to Charitable Foundation, elevating expenses.
• Negative loan growth.  Low interest rates have sparked a wave of mortgage refinancings.  Despite BAC issuing new loans, there existing loan book has been shrinking.  This trend seems to have bottomed.  
• Net Interest Margin (NIM) fell to 1.83% from 1.90%

 

 

• Deposits have grown 14% YOY
• BAC ranked #1 in deposit share
• Fiscal stimulus programs have supported consumers
• BAC pays just .03% on deposits

• BAC has managed the pandemic well with strong credit performance.
• Net charge-offs only 0.27% of loans.  Last year this ratio peaked at 0.45%.  For comparison during 2010, the charge-off ratio peaked at 3.8% showing the relative severity of the Great Recession and the current strength of the U.S. banking system.
• With improving economy and outlook, BAC released $1.6b from loss reserves
• Excess capital
• Last quarter, BAC announce a $25b share repurchase program which is worth 7.5% of outstanding shares. 
• Increased dividend by 17% expected yield is 2.2% for a shareholder yield over 9%.

 

BAC Thesis:

 

• Over the years BAC has dramatically improved their Consumer Banking unit, leveraging technology and their digital platforms which has driven earning’s growth. 
• BAC has a high-quality loan book which was seen during the pandemic as loan loss metrics were best among peers
• BAC has strong earnings power, generating over $5b a quarter in earnings

• BAC continues to build capital which should lead to increased dividends and buybacks
• BAC’s earnings are sensitive to rate increases.  They estimate a 100 bps parallel shift in the yield curve will increase income by $8b or $.90 in EPS.

 

Please let me know if you have questions.

Thanks,

John

 

[category Equity Earnings]

[tag BAC]

$BAC.US

 

 

John R. Ingram CFA

Chief Investment Officer

Partner

 

Direct: 617.226.0021

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Key Takeaways:

 

Current Price: $87.9                 Price Target: $102  

Position size: 2.24%                1-Year Performance: -3%

 

• Sales growth of 11% was above expectations, driven by the Flavor segment recovery and acquisitions
• Consumer segment sales -2% (organic growth down 7% y/y). Household penetration continues and market share gains in various regions. Acquisitions add 2%
• Flavor Solutions +40%% y/y (+25.5% organic), as foodservices and restaurants returning to growth post-pandemic
• Capacity constraints
• Gross margin declined 190bps as sales shift between segments towards lower margin Flavor segment – but up 40bps vs. 2019 level
• Cost inflation not fully offset by price increase
• Operating margin down 200bps vs last year but up 10bps vs. 2019
• FY2021 guidance
• Organic revenue growth now 8-10% from 6-8%
• Cost inflation on commodities, packaging and freight is worse, in the mid-single digits rate
• Raising prices this year to cover costs, but lagging
• Tough comps ahead for top line in 3Q
• Raising EPS guidance to $3.00-$3.05 from $2.97-$3.02 thanks to better revenue outlook
• Valuation is on the higher end on a P/E and FCF yield but MKC is a solid performer year over year and provide good growth and M&A strategy. Long-term thesis is intact.

 

The company provided these data points on consumer behavior around cooking/eating pre and post-pandemic – which highlight the continued secular growth patterns supportive of MKC’s portfolio of brands:

 

 

 

 

The Thesis on MKC:

• Industry Leader: McCormick & Company (MKC) is a leading manufacturer of spices and flavorings. MKC has been in business for 120 years and the founding family still has ownership interest
• Growth opportunity: Spice consumption is growing 3 times faster than population growth. With the leading branded and private label position, MKC stands to be the biggest beneficiary of this global trend
• Offense/Defense: MKC supplies spices to major food companies including PepsiCo and YUM! Brands giving it a blend of cyclical and counter-cyclical exposure
• Balance sheet and cash flow strength offer opportunities for continued consolidation through M&A in the sector

 

$US.MKC

[tag MKC]

[category earnings]

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

Key takeaways:

 

Current Price: $235                Price Target: $255

Position Size: 2.48%              1-Year Performance: +32%

 

• Total company sales +14%, with market share gains during Cinco de Mayo & Memorial Day, and Hard Seltzer gained shelf space
• Beer sales increased by 14% (volume +10.7%)
• Supply shortage (driven by high consumer demand, weather and delay in Obregon coming online) impacted growth – shipments would have been in the high teens vs. +11%. This pressure should ease as the new Obregon facility fully ramps up in the coming months
• On-premise reopening (bars, restaurants) is a positive with +250% growth y/y. 11% of beer volume was sold on-premise, still below pre-covid levels of 15%
• June depletions are up High-single-digits, showing continued good momentum
• Wine & spirits grew +16% organically, driven by high end portfolio
• Inflation: cost inflation in the low-to-mid-single digits due to labor tightness (including truck drivers), commodity costs (aluminum and glass). Those headwinds are expected to be temporary
• Beer operating margin grew 16%
• Gross margin expanded 124bps, total operating margin +107bps. Higher pricing and SG&A expenses management helped offset higher input costs and marketing expenses
• Guidance for fiscal year 2022 EPS increased by $0.05, thanks to lower share count
• Beer net sales remain +7% to +9%, and operating income growth of +3-5%
• Wine & Spirits to decline -22% to -24% (due to sale of business). Excluding divestment, sales would be +2% to +4%
• Share repurchase was 2.2M during the quarter. Accelerated share repurchase program of $1B for FY22 ($523M done this quarter already)
• CEO quotes:
• “We’re very enthused by how June is setting up and is certainly consistent with our long-term algorithm”
• “Due to benefits from our commodity hedging program, we did not experience the expected cost inflationary pressures during this quarter. However, we expect significant inflation headwinds to ramp up during the second half of our fiscal year as current hedges roll off. In addition, we believe the depth and duration of inflationary pressures are becoming more uncertain as the year unfolds”
• “Our outlook as well as sort of the external advice we get on this is still that inflation is going to have a bit of a spike but it’s going to be temporary in nature. The question just is like how temporary”

 

Overall we still see long-term opportunity for growth in this name (including cannabis), and believe it is a good name to hold in staples.

 

Investment Thesis:

• STZ helps position our portfolio to be more defensive at this stage of the economic cycle
• Management team focused on high quality brands and innovation
• STZ continues to have HSD top line growth and high margins that should incrementally improve going forward
• STZ comes out of a heavy capex investment cycle to support its growth: FCF margins are set to inflect thanks to lower capex
• Growth optionality from cannabis investment

 

[tag STZ] [category earnings]

$STZ.US

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

 

Julie S. Praline

Director, Equity Analyst

 

Direct: 617.226.0025

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

 

www.crestwoodadvisors.com

 

Current Price: $291     Price Target: $310

Position size: 4.2%       Performance since inception (3/11): +76%

 

 

Key Takeaways:

1. They beat estimates and raised full year guidance. Revenue (+21%) ahead of high end of guidance range and highest street estimate. Upped full year revenue growth guidance to +10% to +11%, from previous guidance of +6.5% to +8.5%,
2. Broad based strength in demand – digital transformation is long-term secular growth driver to their business.
3. They continue to take significant market share signifying solid business fundamentals. Bookings were up 39% YoY in Q3.
4. CEO Julie Sweet said…“The dynamics in the market we are seeing are not only a recovery from the lower spending pattern at the onset of the pandemic, but a more sustained growth in demand, as companies race to modernize and accelerate their digital initiatives with compressed transformation.”

 

Additional highlights:

• Revenue was +21% constant currency YoY. Included 5pts from Fx. Adjusted EPS of $2.40 (+26% YoY) vs. consensus $1.90, aided by 40bps of op margin expansion. They no longer have the margin expansion tailwind from lower travel as they anniversary the benefit of the compare in this quarter.
• Strong demand trends are impacting their utilization and attrition metrics. Utilization is elevated (~93%) as they try to keep up w/ demand. Attrition went up from 12% to 17%. Up but similar to pre-pandemic levels. Demand for talent is high.
• Bookings growth demonstrating momentum in the business –  Overall book-to-bill of 1.2. Consulting book-to-bill of 1.1 and outsourcing book-to-bill of 1.2. YTD bookings up 25% off a base of record sales through Q3 of last yr. (higher than all of ’19 or ’20 in the first 9 mos.). In the quarter, they also had a record 20 clients w/ bookings >$100 million.
• Now seeing broad based growth across geographies and end markets…
• 11 out of 13 industries growing double-digits
• N. America revenues +18% driven by double-digit growth in public service, software platforms, consumer goods, retail and travel services.
• Europe revenues +14% driven by double-digit growth in UK, Italy and Germany.
• Growth markets +15% led by double-digit growth in Japan and Brazil
• Digital transformation imperative is long-term secular growth driver to their business. Before Covid there was already exponential technology change taking place with every business becoming a digital business. Mgmt. thought it would take a decade, now they think it is more like five years. “We are rapidly moving to a complete re-platforming of global business… it is hugely significant.” Accenture has been positioning themselves to be a leader in digital capabilities since 2014, which is why they are the leader, continue taking share and are well positioned in the future. Accenture’s unique positioning of trusted partner w/ leading edge technology expertise (they have their own network of R&D labs) combined with strategy and consulting practitioners that bring deep industry expertise are key to this. No competitor has their scale, breadth of services and cross-industry insights, which gives them an advantage in serving “compressed transformations.” “Our clients know that through our investments and focus on innovation, we will help future-proof them.”
• Accenture shines from an ESG perspective. They are a real leader in addressing how they create value for all of their stakeholders (employees, customers, vendors, shareholders) – it’s a constant theme on their calls, particularly w/ respect to their employees which is important as the “social” factor for them is very material b/c their industry is a “people business” w/ >500K employees across the globe. For instance, they’ve been heavily investing in upskilling their employees and their workforce is now ~46% women; on track for their 2025 goal of a 50-50 gender balance. They also recently started their “360 degree value initiative” – aimed at helping their clients achieve responsible business goals – they say their clients are increasingly focused on sustainability, inclusion and diversity (rise of ESG is a catalyst to this) and that they are in a unique position to help companies w/ this.
• Capital allocation: they continue to expect to return at least $5.8 billion in cash to shareholders through dividends and share repurchases w/ an expected $8B to $8.5B in 2021 FCF (vs consensus $7.4B). They now expect to invest about $4B (up from $2B) in acquisitions this fiscal year.
• Valuation:
• The stock is undervalued trading at a ~4.4% forward yield at the midpoint of 2021 guidance (they’re already in Q4). FCF estimates for 2021 and 2022 will be going up. They have an easily covered 1.2% dividend and no net debt.
• Multiple underpinned by ACN being a best-in-class company with stable growth that’s buffered by geographic and end market diversity and long-standing client relationships (95 of their top 100 clients have been with them for >10 years).
• They have $10B in cash on their balance sheet. The only debt they have on their balance sheet are capitalized leases, which were added last fiscal year due to an accounting change. Substantially all of their lease obligations are for office real estate.

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$ACN.US

[tag ACN]

[category equity research]